Figures published by the Financial Conduct Authority (FCA) show an increase in people cancelling their DC pension contributions.
SEI analysed a typical 35-year-old saver and found that pausing contributions for just two years, for reasons like managing higher mortgage rates on a two-year fix, could cost this saver an estimated £27,000 in total retirement funds. The impact grows even greater with longer pauses.
The financial services company suggests looking into different solutions to solve this problem. It recommends analysing lower contribution levels as opposed to completely stopping contributions.
SEI says it is important to keep in mind that not every pension provider may provide possibilities for lower contributions. It advises consumers to talk to employers or providers about the potential of lowering contributions. Long-term retirement savings can be significantly impacted by adopting a deliberate strategy and taking into account actual contribution needs.
The firm’s head of master trust and DC director David Snowdon said: “While we have yet to see any real evidence of this within the SEI Master Trust, the FCA data highlights a concerning increase in the number of employed people in the UK pausing their pension contributions, at the same time taking a break from the tax benefits and employer matching that accompanies those contributions.
“Times are hard, and having more money to take home at the end of the month can make a big difference to personal finances, but the financial forfeit for pausing contributions can be much larger.
“I believe employees are unaware of the impact a contribution break could have on the size of their pension pot at retirement. Employees who stop paying into their pension altogether may well regain their employee contribution, but they’ll pass up on free money from their employer in the form of tax-free contribution matching.
“To this end, some employees may have the option to reduce their monthly contributions, as opposed to stopping altogether – this depends on the way their pension plan has been structured. More should be done to raise awareness of this.”